IBM worth keeping
July 6, 2012 9:26PM
Updated: August 9, 2012 6:18AM
D ear Mr. Berko: My pop recently died, and I inherited 40 shares of IBM. According to Pop’s records, he only bought 10 shares from a company called Advest in November of 1996 at $156 a share, but I can’t find where Pop’s 30 other shares came from. He had no other stocks. The lawyer wants to know how Pop got 30 more shares, so I called Advest but they no longer are in business. What happened to them? My ex-wife was a secretary there. I called two other stock firms, but they did not call me back.
I also need to know if I should keep these shares or if it would be good to invest in this stock. I also got Pop’s M1 Carbine made by IBM. My son is in the computer business with Hewlett Packard, and he likes IBM but does not like his Hewlett Packard. My son and I also inherited some mortgages and real estate. Do you think we should sell this?
Des Moines, Iowa
Dear GR: Your lad is right about Hewlett Packard (HPQ — $20). CEO Meg Whitman is having a bear of a time getting all of HPQ’s moving parts moving in the same direction. HPQ, like General Motors, has lots of old-school dunderheads who equate innovation with immolation. That’s a tough battle to fight, and as a testament, HPQ has, in a two-year rising market, imploded from $55 a share in mid-2010 to $20 today. IBM, on the other hand, has risen over 50 percent in that same time frame.
Advest was a small, reputable brokerage firm run by some smart fellows making some fairly smart decisions. But when a new CEO took over in November 1998, the dumb fellows began to outnumber the smart fellows, and the dumb fellows began making some really dumb decisions. A few years later, Advest was absorbed by a backwater firm called Lebenthal that most on the Street believed was a joke. And it was!
However, any broker would have told your lawyer that IBM split 2 for 1 in 1997, so Pop’s 10 shares increased to 20. Then the broker would have told your lawyer that IBM split 2 for 1 again in 1999, and Pop’s 20 shares became 40. So Pop’s cost basis for IBM is $39 a share. If your Des Moines lawyer couldn’t figure this out by himself, you might want to change counsel. Meanwhile, I can’t answer your questions about the mortgages and real estate. You need a a trustable real estate professional. So I called a retired lawyer friend of mine in Des Moines, and he gave me two names, both of which I have emailed to you.
IBM (IBM — $197) should have significant value to investors, and as its stock continues to rise, there’s a good possibility IBM will split 2 for 1 again, so your 40 shares will turn into 80. This year, IBM will generate $106 billion in revenues as a worldwide supplier of advanced information-processing technology, communications systems, services and program products. A dozen years ago, IBM’s revenues were $75 billion and Net Profit Margins (NPM) were 7.5 percent. While revenues have increased 50 percent, NPM, a superb measure of superior management, doubled to 15.1 percent.
There are many companies doing many of the things IBM does. But none can put everything together in one super package including a brilliant R&D division, the envy of industry with the skills, effectiveness and knowledge of an IBM team known to many as Big Blue. The Street expects earnings to grow 6 percent a year for the next five years ($21 per share), convincing many analysts to believe IBM could trade at $287 by 2017. That enthusiasm suggests you keep IBM and consider owning a few more shares. Then in a few years, when management announces its R&D department is on track to develop a full-scale quantum computer (the Holy Grail) taking computing to a whole new level, the share price will blast through the Super Dome roof.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.